Bundling cloud software to fight piracy: an economic analysis

Xiong ZHANG, Wei T. YUE, Wendy HUI

Research output: Journal PublicationsJournal Article (refereed)

Abstract

Purpose
The emergence of internet-enabled technology has led to the software service model in which the software firm, instead of the consumer, maintains software ownership. This model can curtail software piracy more effectively than the traditional on-premises software model. However, software firms are not abandoning traditional on-premises software but embracing both models simultaneously. In this study, the authors consider a firm’s software bundling decision in combination with its piracy deterrence strategy. The paper aims to discuss these issues.

Design/methodology/approach
The authors build three stylized models to analytically compare the bundling strategies under three scenarios: no piracy, piracy is present and piracy is present while the firm applies digital rights management (DRM).

Findings
The authors find pure bundling (PB) to be the optimal strategy due to the combination of competition and cannibalization effects in mixed bundling (MB). Simultaneously, consumers may enjoy greater surplus in PB than in MB, making PB the preferred strategy for both the firm and consumers. Interestingly, the win-win outcome coexists with some degree of piracy in the market.

Originality/value
The results provide important insights for firms and policy-makers and contribute to the literature on piracy and product bundling. First, the authors show piracy could be another driver for product bundling, which has never been discussed in prior literature. Second, the authors suggest an alternative perspective; that PB may be a desirable outcome for both firms and consumers when considering piracy and DRM. More surprisingly, this desirable outcome occurs with some level of piracy in the market. The presence of piracy leads to competition and cannibalization effects in MB, which eventually results in the win-win outcome in the software market for both the firm and the consumers.
Original languageEnglish
Pages (from-to)191-241
Number of pages51
JournalInternet Research
Volume30
Issue number1
DOIs
Publication statusE-pub ahead of print - 26 Jul 2019

Bibliographical note

This work was partially supported by grants from National Natural Science Foundation of China (Grant No. 71801014), Beijing Social Science Foundation (Grant No. 17GLC069) and the Research Grants Council of the Hong Kong Special Administrative Region, China (Project No. CityU 195913).

Keywords

  • Digital rights management
  • Software piracy
  • Bundling strategy
  • Internet-enabled software service
  • Software product

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